Ageing Societies and the Looming Pension Crisis

Nearly all OECD countries face the need to reform their pensions system. Some have already taken steps, while others are getting ready to. Reforms are necessary to ensure the sustainability of pay-as-you-go schemes. But this is only one part of the equation. Pension reform needs to go hand in hand with changes in the behaviour and attitudes of all actors involved to promote a longer working life.

There are essentially three aspects to this issue:

If nothing is done quickly to extend working lives, living standards will fall in the course of the coming decades. We know, because of the ageing of our populations, that there will be fewer and fewer persons of working age to support more and more older people. For the OECD as a whole, the dependence ratio of older people (i.e. those aged 65 and over as a proportion of those aged 20-64) will rise from the current figure of 22%, to 46% in 2050. In these circumstances, it is essential to have as many people working as possible - young people, women and especially older workers.

This is not an insurmountable challenge. Most countries have considerable manoeuvring room to increase the employment rate of persons between age 55 and 64. The average rate in the OECD is currently 48% -- varying from 25% or less in France and Belgium, to 70% in Switzerland.

The first step governments can take is to eliminate provisions that subsidise early withdrawal from active life -- first and foremost, early retirement schemes. Some countries have already taken that step, but experience shows that it is not enough. In many cases, the actual retirement age remains 2 to 3 years below the statutory retirement age, because other provisions continue to encourage people to stop working. In Austria, for example, one man out of two leaves the labour market with a disability pension. Sweden is currently experiencing a sharp increase in the number of older workers on long-term sick leave. Elsewhere, in places such as France and Belgium, the entitlement to unemployment benefit -- without any obligation to search actively for a new job -- mean that older individuals can sometimes shift directly from unemployment rolls into retirement.

While it is desirable for older workers to remain in the labour market, steps must be taken to ensure that they have real employment prospects. Their jobs must be of sufficient quality to encourage them to stay on for an extended period. This requires a veritable change in attitude on the part of all the actors concerned.

Governments must adapt their employment policies. Public employment services must meet the specific needs of older workers and measures that reduce benefit dependency and facilitate the integration of older workers in the labour market should also be taken. Enterprises must learn to view older workers as a genuine asset. They will need to eliminate discrimination against older workers, invest in their training, and adapt working hours and conditions to fit their needs. Lastly, workers must also understand that early retirement is not a vested right and that they must get used to the idea of a longer career, perhaps taking on different jobs towards the end of their working lives.

In sum, the issues of demography and older workers go well beyond the reform of pension systems. They are a matter of social equity, not only between workers and pensioners, but also between generations. Without reform, and without a change in attitude, it will be our children and grandchildren who will pay the price.

2. Background reading

Public Pensions

Government pension plans, most of which collect contributions from current workers to pay the pensions of current retirees, likely face a funding squeeze in many OECD countries as the size of the working age population shrinks and the size of the retired population grows. For further reading:

Policies for an ageing society: recent measures and areas for further reform
This paper provides a synthesis of age-related developments and policies for a range of OECD countries, drawing on recent OECD work. It describes the expected impact of ageing on expenditure and fiscal pressures taking into account the current configuration of age-related policies.
(Economics Department Working Papers no. 369)

Issues Concerning Occupational Schemes for Civil Servants and Other Public Sector Workers
This document raises some policy issues regarding the pension plans of public sector workers, which may include workers employed by central, federal, and local governments as well as workers working for state enterprises. These plans may be classified as private or public depending on the legal nature of the institution responsible for administering the payment of benefits.

Private Pensions

Private retirement plans, whereby companies and workers typically set aside some earnings today that they can draw on to pay pensions in the future, face different challenges. Low interest rates, slumping stock markets and corporate bankruptcies have left many retirement funds short of resources. OECD governments in 2002 approved governance guidelines for private pension funds that are designed to guard against mismanagement. For further reading:

"Prudent Person Rule" Standard for the Investment of Pension Fund Assets
One key aspect of the policy debate has been whether pension asset management
should be regulated by quantitative criteria or by the so-called prudent person rule, which is a behaviourally-oriented standard. The debate is a significant one, because its outcome determines who – the state or the pension fund’s governing body – will be responsible for establishing the initial asset allocation parameters for pension investment activity.